Tax Type
Retail Sales and Use Tax
Description
Manufacturing; Barges Used to Transport Mined Products
Topic
Taxability of Persons and Transactions
Date Issued
10-16-1992
October 16, 1992
Re: §58.1-1821 Application: Sale and Use Tax
Dear*************
This will reply to your letter of September 24, 1991 in which you seek a refund of sales and use taxes paid by*********************(the "Company") on its purchase of barges used to transport materials between its two processing sites.
FACTS
The Company is in the business of mining stone, sand and gravel (collectively referred to as "mined products") for use in its production of cement and related products. During the period from September 1987 through June 1989 the Company purchased fifteen barges. At the time of such purchases the Company paid use tax to the vendors of the barges. The Company has filed an appeal pursuant to Va. Code § 58.1-1821 to obtain a refund of the taxes paid on such purchases.
The Company extracts the mined products from quarries on land and from river beds located in *************. Certain mined products are passed through crushers and sifters which reduce the materials to a size suitable for further processing. The mined products are then loaded on the barges and transported on public waterways to the Company's processing facility in***************. While on the barges the mined products, which have been extracted from a river bed, are placed in bins which allow such material to drain.
The Company claims that it is essential that the materials used in the processing of the cement and related products do not contain any water. Based upon the fact that certain mined materials dry in the bins while in transit to the Company's processing facility in********** the Company avers that it uses the barges directly in the manufacturing of cement and related products. Additionally, the Company claims that the manufacturing process begins in ***************and ends in **************** since "processing" occurs on the barges. Finally, the Company argues that since the barges are used directly in the manufacturing process, they should be exempt from taxation pursuant to the manufacturing exemption.
DETERMINATION
A manufacturer's or processor's purchase of equipment will not qualify for the manufacturing exemption unless the equipment purchased satisfies two requirements. First, the equipment must be used directly in processing, manufacturing, refining, mining or conversion of products for sale or resale. Va. Code §58.1608(3)(iii). The term "used directly" refers to the activities that are an integral part of the production of a product. Virginia Regulation (VR) 630-10-63(B)( 2).
To meet this requirement, the company would have to establish that it is not only necessary that the water drains from all of the material but that it is essential that the process occurs on board a barge that is headed down river for further processing. Based upon the information provided, it appears that even if the materials were to drain while they were on land, they could be used in the production of cement and related products. Therefore, the fact that materials dry while in transit is merely a convenience to the Company and not an essential and integral step in the manufacturing process.
Secondly, the equipment which is used directly in the production process must be used at the plant site during the production process. Equipment that is used outside of the beginning and ending points of the production process or "to convey products or material between two plant sites" will not qualify for the exemption. VR 630-10-63(B) (2). Similarly, paragraph (C)(2) of the regulations provides that tangible personal property used to transport raw material to a plant site is taxable.
In the instant case, the Company argues that the production process begins in Richmond where the raw materials are mined and continues while the raw materials are transported between ************* and ************* since certain raw material dry while in transit. The Company claims that due to the fact that it is essential to the further processing of the raw materials that the materials not contain any water, the processing function continues while the materials are on the barges.
The department has held, on numerous occasions, that a manufacturer that processes material in various locations actually operates more than one separate and distinct processing operation. See P.D. 84-200 (October 25, 1984); P.D. 86-98 (May 22, 1986); P.D. 88-338 (December 23, 1988). The Company's processing activity in******* is a separate and distinct operation from the processing activities it performs in ********The fact that certain materials may dry while in transit to the************** location is clearly ancillary to the transportation function.
Finally, the Company argues that the raw materials are further mined (permitted to dry) as they are transported to the******** plant and are entitled to the mining exemption as set forth in Commonwealth of Virginia, Dep't of Taxation v. Wellmore Coal Co., 228 Va. 149 (1984). In Wellmore the Supreme Court held that equipment used to transport raw materials between mining and processing sites is entitled to be exempt from taxation. I do not agree with the Company's application of Wellmore to its transportation of the raw materials between ******** and*****************. The Company's transportation activities occur between two processing facilities, therefore, the Wellmore case is inapplicable.
I understand that you requested a conference prior to our determination of this matter in the event that the Company's request for a refund was denied. We shall grant you a conference if you can present new evidence that will alter the basis upon which this determination has been made. If we do not hear from you within thirty days from the date hereof, this determination shall be final.
Sincerely,
W. H. Forst
Tax Commissioner
OTP/5652O
Rulings of the Tax Commissioner